Rate cycle is two basis points away

 The two year Treasury earns .19%, the on year a mere .06%, When the difference is 15 basis points, the primary dealers will begin holding and trading more one year. That means the reserves will start to drain.  The Fed then has a tough choice, let the reserves drain and apply a much heftier seigniorage tax or raise the Fed IOER or begin selling its balance sheet.

That moment of decision looks to be this quarter. The dependent factor is Treasury and its ability to quickly cover increasing interest costs. If taxes come thought, Treasury gets breathing room, but taxes are not coming thought in time. Janet might have no choice but to run the curve flat again as she jumps onto the short end to reduce interest charges as best as possible.

I keep thinking the bond market is testing my theory on this. But not really, I have seen the 15 basis point effect during Obama era.